Reference no: EM132927909

Problem 1: Costco carries an average inventory of $1,500,000. Its annual sales are $7 million and its gross profit margin is 50%. The receivables conversion period is 1.5 times longer than its payable deferral period. Costco's trade terms with its suppliers is net 90 and it always pays on time (never early and never late). Costco's new CFO wants to improve the cash conversion cycle by 35 days, based on a 365-day year. His first strategy is to tighten the credit term with its own customers and aggressively reduce his account receivable balance by 25% and he thinks this move will drive away customers and reduce the annual sales by 15%. His second strategy is to reduce the amount of inventory to $1,000,000 and he thinks the gross profit margin will reduce from 50% to 45% as he purchases less from his suppliers. By how much must the firm accounts payable level change in order to meet its goal of a 35-day reduction in the cash conversion cycle? Is it an increase or decrease in accounts payable level?